Jet Engine Manufacturers Are Raking In Cash

"Few industries do well when their products are forever being returned for early repairs. Jet-engine makers are currently an exception -- and this is raising eyebrows.

Shares in RTX Corporation hit a record high last week after the aerospace conglomerate significantly beat second-quarter earnings forecasts. Excluding one-time effects, operating profit in its Pratt & Whitney engine-making division rose 23%. GE Aerospace also reported a surge in demand for spare parts for commercial engines, and its stock closed at a 16-year high last Tuesday. In Europe, jet-engine manufacturers Rolls-Royce and Safran are expected to post robust results when they report this week.

For many in the industry, it is hard to square such prosperity with problem-ridden engines that are causing huge headaches.

Pratt & Whitney's geared turbofan, or GTF, and the LEAP built by CFM -- a joint venture between GE and Safran -- are the two main state-of-the-art engine families in today's narrow-body commercial jets. Both are suffering from durability issues that are pushing up maintenance costs. The GTF's powder-metal defects have grounded hundreds of Airbus A320neo planes for inspections and engine removals.

Shop visits have got longer, in part because the engine companies shed too many experienced employees during the pandemic. This problem has been compounded by a dearth of spare parts, which has diverted resources away from the manufacture of new engines. During the second quarter, GE delivered 297 units of the LEAP, which includes models for both the A320neo and the Boeing 737 MAX, compared with 419 in the same period of 2023.

Slow engine production is in turn slowing plane assembly and even orders. At the Farnborough International Airshow, which took place near London last week, Boeing and Airbus received orders and commitments for 282 jets in total, compared with 309 in 2022 and 1,143 in 2018.

The engine bottleneck has put the spotlight on how manufacturers make money. Usually, turbofans are sold at a loss, with profit clawed back over years in the so-called aftermarket of maintenance, repairs and overhauls. That means a situation in which shop visits are more frequent, fewer new engines are made and old planes are flown for longer is advantageous for manufacturers. It also makes them reluctant to accelerate the development of new, more fuel-efficient generations of engines that might shorten the lifespan of existing models.

This doesn't mean new engines are made to break down, as conspiracy theorists would have it. For one, widespread groundings often involve compensation, which Pratt & Whitney has now had to offer to many affected airlines, including Spirit Airlines, Turkish Airlines and IndiGo.

Nor is it surprising that development cycles are getting longer: Extracting a 15% increase in efficiency from every new generation -- the historical norm -- is getting harder.

And there is a reason for relying on the aftermarket: The colossal upfront cash requirements of new engine programs is best offset with a steady stream of revenues. Even so, a lot of volatility remains, as when paralyzed global fleets stopped needing maintenance during the Covid-19 crisis. It is only over the past year that shares in engine makers have risen significantly above 2019 levels. Still, the business model undeniably gives engine makers different incentives from their customers, Boeing and Airbus.

A prime example is the engine makers' caution to increase production, which helps explain why the supply chain seems to be permanently 18 months away from being fixed. Airbus's head of commercial aircraft, Christian Scherer, has expressed his frustration at having to push back production goals.

Without new aircraft programs to put pressure on suppliers, the interests of engine makers are likely to keep prevailing. But long-term shareholders in the likes of RTX and GE Aerospace also need to consider the risk of an eventual backlash. When "clean-sheet" jet designs finally do come along, financial arrangements between plane and engine makers might be different, perhaps giving the former a bigger piece of the pie. Capitalism offers strong incentives for finding ways around supply bottlenecks." [1]

1. Jet Engine Manufacturers Are Raking In Cash. Sindreu, Jon.  Wall Street Journal, Eastern edition; New York, N.Y.. 30 July 2024: B.12.